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Company Accused of Being ‘Pharmaceutical Enron’ Doesn’t Appreciate the Sentiment

When people ask, "Is so-and-so the next Enron?" they usually don't make a strong case that "so-and-so" is much like Enron. Rather, "It's involves some accounting mumbo jumbo, so let's call it Enron."

Which brings us to Valeant Pharmaceuticals, who hasn't had a good day. A report from Citron Research claims that the company is basically selling inventory to itself and calling it revenue. It goes on to ask questions like, "Is this Enron Part Deux?" and "Could this be the Pharmaceutical Enron?" It even mentions that Valeant CEO Mike Pearson and Jeff Skilling both being McKinsey alums is "too much of an eerie coincidence" so that's all pretty fun since it actually delivers supporting evidence for Enron-like behavior. The whole situation is less fun for shareholders and bondholders, of course.

Anyway, MarketWatch has a the best tl;dr version, noting that Valeant didn't take too kindly to the report. 

The report by short selling firm Citron Research published earlier alleged a secret relationship between Valeant and a subsidiary called Philidor and a customer of Philidor's called R&O. Citron claimed that Philidor and the customer are one and the same, meaning that Valeant was shipping product to a subsidiary and then falsely claiming the revenue. Valeant said R&O is part of a network of pharmacies to which Philidor provides back-end services, including a call center. "All shipments to Philidor and other pharmacies in the Philidor pharmacy network, including R&O, are not recorded in Valeant's consolidated net revenue," the company said in a statement. "Sales are recorded only when the product is dispensed to the patient." Valeant said sales to Philidor and others in its network are accounted for as intercompany sales and eliminated in consolidation. Inventory at those pharmacies is included in Valeant's consolidated inventory balances, meaning it has no sales benefit from that inventory. "The timing of our revenue recognition by selling through the Philidor pharmacy network is actually delayed when compared to selling through the traditional wholesaler channel," said the statement.

For more on that secret relationship, you must read Roddy Boyd's report over at the Southern Investigative Reporting Foundation that was published on Monday. It looks into an odd lawsuit that provides a lot of background:

According to a lawsuit filed by R&O, Russell Reitz [The "R" in "R&O"] got a letter from Robert Chai-Onn, Valeant’s general counsel and director of business development, requesting repayment of $69.8 million for “invoiced amounts.” This apparently struck Reitz as odd since R&O had done no business, at least in any direct fashion, with Valeant. Moreover, he had never received a single invoice from Valeant or its subsidiaries.

Reitz forwarded the letter to Gary Jay Kaufman, his lawyer down in Los Angeles, who sent a letter to Chai-Onn on September 8 noting that the lack of invoices from Valeant indicated to him one of two things was happening: Valeant and R&O were being jointly defrauded by someone, or Valeant was defrauding R&O.

Reitz was, however, doing business with Philidor, and Valeant's relationship with them was not previously disclosed to investors.

Citron is not wasting this information. Here's Bloomberg:

Citron said that lawsuit is evidence that Valeant is creating invoices "to deceive the auditors and book revenue."

“Valeant/Philidor have created an entire network of phantom captive pharmacies” to create fake sales of drugs or to avoid scrutiny from auditors, Citron said.

The auditor, for the record, is PwC.

Valeant tried to explain all this but people can't help but think of ol' E-word. I guess we'll all know for sure if Valeant makes it to Broadway.

The King’s Gambit: Valeant’s Big Secret [SIRF]
Valeant dismisses 'erroneous' report on revenue recognition, defends its accounting [MW]
Valeant Plummets on Allegation of Enron-Like Accounting [Bloomberg]
Pharma giant Valeant is compared to Enron, stock craters [BI]